The paper seeks to uncover what are the implications of private enforcement for deterrence, leniency, and consumer welfare. To address this question, the authors develop a dynamic model that considers two opposing effects on deterrence that arise from allowing partial compensation of victims. First, competition damages may reduce incentives to apply for leniency. Second, liability for damages may lead firms to refrain from engaging in a cartel in the first place by increasing potential participation costs. The authors find that these effects act in opposite directions, so there is a balance to be struck between promoting compensation and leniency applications.

The paper is organized as follows.

Section II discusses the legal position of competition victims under the EU Damages Directive, and remaining obstacles to obtaining compensation.

The Directive aims to remove the main obstacles that victims of competition law infringements face when trying to obtain compensation for their loss. The Directive specifies that “any natural or legal person who has suffered harm caused by an infringement of competition law is able to claim and to obtain full compensation for that harm”. Full compensation means that the victim will be placed in the position in which s/he would have been had the infringement not been committed. However, the authors assume that victims may receive only partial compensation for their harm, to reflect the various obstacles they still face when filing a claim for damages compensation. These include: (i) obtaining access to necessary evidence; (ii) the need to prove the actual existence and amount of loss, as well as the causal link between the cartel and the victim’s losses; (iii) the possible effects of passing on defences; (iv) other procedural obstacles.

Section III provides a concise overview of the economic literature on the enforcement of competition law, leniency, and cartel damages.

In short, leniency programs may strengthen public enforcement by destabilising cartels and helping to provide competition authorities with the necessary information to sanction cartels. However, the theoretical literature suggests that facilitating private damages actions tends to limit the effectiveness of leniency programs. The reasoning is that while a potential leniency applicant may benefit from immunity from, or a reduction in fines, that benefit is liable to be outweighed by an increased risk of liability for damages.

Section IV develops a dynamic model of the incentives for firms to form a cartel and, if they did so, to apply for leniency in the presence of follow-on damages claims. Section V then analyses the results of the model.

This model is different from those already available in the literature in that it captures not only the implications of damages on leniency, but also on cartel dynamics. Outcomes under the model will depend on the amount of harm inflicted on consumers, the probability of detection, the victims’ position and the amount of the fine. The probability of detection, the level of fines, and the position of victims in private damages actions are “policy variables”, i.e. policy-makers may try to manipulate these variables to influence firms’ decisions. For example, an increase in the level of fines has a deterrent effect and should reduce the incidence of cartel behaviour.

Probability of detection is a key variable in this model. Consumers are best-off if the probability of detection is high and they have a very strong legal position as regards compensation claims. In that case, the formation of a cartel is effectively deterred and the expected net loss will be zero because consumers will be fully compensated for their loss. Consumers will be in the worst possible position in any scenario where the probability of detection is zero, in which case they will suffer harm and not receive any compensation. In between, an increase in the probability of detection should generally lead to a reduction in the victims’ expected net loss. There are, however, two situations where an increase in the probability of detection has no influence on the victims’ expected net loss. The first is where the formation of a cartel was already effectively deterred, in which case the victims’ expected net loss is zero. The second is where the cartelists apply for leniency, in which case the victims’ expected net loss depends on what damages they are able to claim.

The authors are especially interested in the impact of an increase in the level of victim compensation on deterrence. In most cases, a marginal improvement in the victims’ legal position as regards compensation will not lead to a change in the behaviour of (potential) cartelists, even as an improvement in the legal position of victims will lead to an increase in consumer welfare (via an increase in expected compensation). In a number of (exceptional) cases, an improvement in the victims’ legal position as regards compensation may, however, reduce consumer welfare by increasing consumers’ expected loss. These are cases in which cartelists, in response to an improvement of the legal position of victims, decide not to apply for leniency. As a consequence, consumers may be worse off.

Section VI concludes.

Using a relatively simple two-period model, the paper concludes that it appears to be possible to gain better insights into the interaction between leniency programs and damages actions. This has implications for the debate on the interplay between public and private enforcement of competition law. Clearly, private damages may drive out leniency applications, but that does not necessarily imply a decrease in the effectiveness of competition law. The reason is that facilitating private damages actions may increase the deterrent effect of competition law by discouraging firms from entering into a cartel. The ideal outcome, therefore, is one which balances these two effects.

Comment:

This economics paper is surprisingly easy to read for a lawyer. As is often the case, I am not able to comment on the technical details of the paper, but the assumptions and conclusions make intuitive sense to me. My only serious complaint is that it is only indirectly related to the European Damages Directive, unlike what is promised in the title.

The literature on the relationship between the award of competition damages and the effectiveness of public enforcement strikes me as being in its infancy. The literature review on the impact of private damages on incentives to apply for leniency pursued in this paper did not include a single empirical study – all papers deal in theoretical models, most of which start with assumptions that virtually beg the conclusion that increased compensation will lower incentives to apply for leniency. This conclusion sometimes makes its way into policy debates, and I have heard it be asserted despite not having ever seen empirical evidence of this relationship.

This paper raises a related, but arguably more important question: what is the impact of compensation of competition losses on consumer welfare and deterrence more widely? It adds complexity to the private v public enforcement debate, which is laudable in itself. I can only hope to see more work on the topic in the future, preferably supported by empirical studies.